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Why GAO Did This Study
The disastrous hurricanes that have struck the Gulf
Coast and Eastern seaboard in recent years— including Katrina, Rita, Ivan, and
Isabel—have focused attention on federal flood management efforts. The National
Flood Insurance
Program (NFIP), established in 1968, provides property
owners with some insurance coverage for flood damage. The Federal Emergency Management Agency
(FEMA) within the Department of Homeland Security is
responsible for managing the NFIP.
This
testimony offers information from past GAO work on (1) the financial structure
of the NFIP; (2) why the NFIP insures properties for repetitive flood losses
and the impact on NFIP resources; and (3) compliance with requirements for
mandatory purchase of NFIP policies. The testimony also discusses
recommendations from a report GAO is issuing today on FEMA’s oversight and
management of the NFIP.
What
GAO Recommends
In the report released today, GAO is recommending,
among other things, that FEMA and its partners use a statistically valid
approach to sample NFIP insurance claim files for quality assurance purposes,
and that DHS and FEMA develop and document plans for implementing requirements
of the Flood Insurance Reform Act of 2004, which reauthorized the NFIP. FEMA disagreed with those recommendations.
To view the full product, including the scope and
methodology, click on the link above. For more information, contact William O.
Jenkins, Jr., at (202) 512-8777 or jenkinswo@gao.gov.
October 2005
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FEDERAL
EMERGENCY MANAGEMENT AGENCY
Challenges Facing the National Flood Insurance
Program
What GAO Found
As GAO has reported, the NFIP, by design, is not
actuarially sound. The program does not collect sufficient premium income to
build reserves to meet long-term future expected flood losses, in part because
Congress authorized subsidized insurance rates to be made available for some
properties. FEMA has generally been successful in keeping the NFIP on a sound
financial footing, but the catastrophic flooding events of 2004 (involving four
separate hurricanes) required FEMA, as of August 2005, to borrow $300 million
from the U.S. Treasury to help pay an estimated $1.8 billion on flood insurance
claims. Following Hurricane Katrina in August 2005, legislation was enacted to
increase FEMA’s borrowing authority from $1.5 billion to $3.5 billion through
fiscal year 2008.
Properties that suffer repeated
flooding but generally pay subsidized flood insurance rates—so-called
repetitive-loss properties—constitute a significant drain on NFIP resources.
These properties account for roughly 1
percent of properties insured under the NFIP, but account for 25 percent to 30
percent of all claim losses. The Flood Insurance Reform Act of 2004 established
a pilot program requiring owners of repetitive-loss properties to elevate,
relocate, or demolish houses, with NFIP bearing some of those costs. Future
studies of the NFIP should analyze the progress made to reduce the inventory of
subsidized repetitive-loss properties, and determine whether additional
regulatory or congressional action is needed.
In 1973 and again in 1994, legislation
was enacted requiring the mandatory purchase of NFIP policies by some property
owners in high-risk areas. In June 2002, GAO reported that the extent to which
lenders were required to enforce mandatory purchase requirements was unknown.
While FEMA officials believed that many lenders often were noncompliant,
neither side could substantiate its claims regarding compliance.
FEMA did not use a statistically
valid method for sampling files to be reviewed in its monitoring and oversight
activities. As a result, FEMA cannot
project the results of these reviews to determine the overall accuracy of
claims settled for specific flood events or assess the overall performance of
insurance companies and their adjusters in fulfilling responsibilities for the NFIP—actions
necessary for FEMA to have reasonable assurance that program objectives are
being achieved.
FEMA has not yet fully implemented
provisions of the Flood Insurance Reform Act of 2004 requiring the agency to
develop new materials to explain coverage and the claims process to
policyholders when they purchase and renew policies, establish an appeals
process for claimants, and provide insurance agent education and training
requirements. The statutory deadline for implementing these changes was December
30, 2004, and as of September 2005 FEMA had not developed documented plans with
milestones for meeting the provisions of the act.
United States Government Accountability Office
Mr. Chairman and Members of the
Committee:
I appreciate the opportunity to
participate in today’s hearing on the future of the National Flood Insurance
Program (NFIP) to discuss issues related to the future financial stability of
the NFIP and recommendations we have made for improvements to the management
and oversight of the program. The NFIP combines property insurance for flood
victims, mapping to identify the boundaries of the areas at highest risk of
flooding, and incentives for communities to adopt and enforce floodplain
management regulations and building standards to reduce future flood damage.
The effective integration of all three of these elements is needed for the NFIP
to achieve its goals of:
•
providing property flood insurance coverage for
a high proportion of property owners who would benefit from such coverage;
•
through this insurance coverage reducing
taxpayer-funded disaster assistance when flooding strikes, and
•
reducing flood damage through flood plain
management and the enforcement of building standards (such as elevating
structures).
The Federal Emergency Management
Agency (FEMA) within the Department of Homeland Security (DHS) is responsible
for the oversight and management of the program.[1]
Under the program, the federal government assumes the liability for the
insurance coverage and sets rates and coverage limitations, among other
responsibilities.
Floods are the most common and
destructive natural disaster in the United States. According to NFIP
statistics, 90 percent of all natural disasters in the United States involve
flooding. However, flooding is generally excluded from homeowner policies that
typically cover damage from other losses, such as wind, fire, and theft. Because
of the catastrophic nature of flooding and the inability to adequately predict
flood risks, private insurance companies have largely been unwilling to
underwrite and bear the risk of flood insurance.
Congress established the NFIP
pursuant to the National Flood Insurance Act of 19682
to provide policyholders with some insurance coverage for flood damage, as an
alternative to disaster assistance, and to try to reduce the escalating costs
of repairing flood damage. In creating the NFIP, Congress found that a flood
insurance program with “large-scale participation of the Federal Government and
carried out to the maximum extent practicable by the private insurance industry
is feasible and can be initiated.”3 In keeping with this purpose, FEMA has
contractual agreements with 95 private insurance company partners to sell
policies and adjust and process claims.
As of August 2005, the NFIP was
estimated to have approximately 4.6 million policyholders in about 20,000
communities. Since its inception, the program has paid about $14.6 billion in
insurance claims, primarily from policyholder premiums that otherwise would
have been paid through taxpayer-funded disaster relief or borne by home and
business owners themselves. According to FEMA, every $3 in flood insurance claims
payments saves about $1 in disaster assistance payments, and the combination of
flood plain management and mitigation efforts save about $1 billion in flood
damage each year.
The unprecedented damage wrought by Hurricanes Katrina and
Rita are also likely to result in unprecedented claims on the NFIP. GAO is
beginning a body of work on the preparation for, response to, and recovery from
Hurricanes Katrina and Rita. As GAO moves forward with this work, we will
continue to work with this and other congressional committees and the
accountability community—federal inspector generals, state and city
auditors—regarding the scope of our future work on emergency management issues,
including the NFIP. Our goal is to apply our resources and expertise to address
long-term concerns, such as those we are discussing today, and to avoid
duplicating the work of others. Currently, we have teams in the Gulf Coast
states collecting data and observations from hurricane victims and federal,
state, local, and private
The National Flood Insurance Act of
1968, as amended, is codified at 42 U.S.C. 4001 to 4129.
342 U.S.C.
4001(b)(2).
participants in the preparation
for, response to, and recovery from these devastating hurricanes, including the
flooding they caused.
Past experience can provide
context for considering future policy options. In this spirit, my testimony
today is based on a body of work that GAO has done over the past several years
before the nation began the struggle to respond to the devastating effects of
Hurricanes Katrina and Rita in our Gulf Coast states. This prior work has
addressed the issues of the program’s structure and financing, repetitive loss
properties, mandatory and voluntary purchase of flood insurance, and revising
and improving the nation’s flood maps. Together they provide information useful
in assessing efforts over the NFIP’s history to enhance the program’s financial
stability and effectiveness. Today, we are also releasing a report on FEMA’s
management and oversight of the flood insurance program that includes several
recommendations for improvement.[2]
This report was mandated by the Flood Insurance Reform Act of 2004.[3] It
includes recommendations
on two pre-Hurricane Katrina
flood-insurance related issues that pose a challenge for FEMA. These are (1)
improving FEMA’s management and oversight of the NFIP and (2) FEMA’s
implementation of provisions of the Flood Insurance Reform Act of 2004 to
provide policyholders a flood insurance claims handbook that meets statutory
requirements, to establish a regulatory appeals process, and to ensure that
flood insurance agents meet minimum NFIP education and training requirements.
The report we are releasing
today is based on interviews with FEMA officials, documentation of its
monitoring and oversight processes, and our field observations of FEMA’s
monitoring and oversight activities. In addition, we analyzed the National
Flood Insurance Act of 1968, as amended, its legislative history, and FEMA’s
implementing regulations, and we examined documentation and interviewed
officials about FEMA’s efforts to comply with provisions of the 2004 Flood
Insurance Reform Act. We did our work from December 2004 to August 2005 in
accordance with generally accepted government auditing standards.
Major Program
Issues—A Summary
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•
•
•
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A key characteristic of the
NFIP is the extent to which FEMA must rely on others to achieve the program’s
goals. FEMA’s role is principally one of establishing policies and standards
that others generally implement on a day-to-day basis and providing financial
and management oversight of those who carry out those day-to-day
responsibilities. These responsibilities include ensuring that property
owners who are required to purchase flood insurance do so, enforcing flood
plain management and building regulations, selling and servicing flood
insurance policies, and updating and maintaining the nation’s flood maps. In
our prior work, we have identified several major challenges facing the NFIP:
Reducing losses to the program resulting from policy subsidies and
repetitive loss properties.[4]
The program is not actuarially sound because of the number of policies in
force that are subsidized—about 29 percent at the time of our 2003 report. As
a result of these subsidies, some policyholders pay premiums that represent
about 35-40 percent of the true risk premium. Moreover, at the time of our
2004 report, there were about 49,000 repetitive loss properties—those with
two or more losses of $1,000 or more in a 10-year period—representing about 1
percent of the 4.4 million buildings insured under the program. From 1978
until March 2004, these repetitive loss properties represented about $4.6
billion in claims payments.
Increasing
property owner participation in the program. As little as half of
eligible properties may participate in the flood insurance program. Moreover,
the extent of noncompliance with the mandatory purchase requirement by
affected property owners is unknown.
Developing accurate,
digital flood maps.[5]
In our report on the NFIP’s
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flood map modernization program, we discussed the multiple
uses and benefits of accurate, digitized flood plain maps. However, the NFIP
faces a major challenge in working with its contractor and state and local
partners of varying technical capabilities and resources to produce accurate,
digital flood maps. In developing those maps, we recommended that FEMA develop
and implement data standards that will enable FEMA, its
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contractor, and its state and local partners to identify and use consistent
data collection and analysis methods for developing maps for communities with
similar flood risk.
• Providing effective oversight of flood
insurance operations. In the report we are releasing today, we note that
FEMA faces a challenge in providing effective oversight of the 95 insurance
companies and thousands of insurance agents and claims adjusters who are
primarily responsible for the day-to-day process of selling and servicing flood
insurance policies.
The NFIP Pays Expenses and Claims
with Premiums, but Its Financial Structure
Is Not Designed to be
Actuarially
Sound
To the extent possible, the NFIP is
designed to pay operating expenses and flood insurance claims with premiums
collected on flood insurance policies rather than with tax dollars. However, as
we have reported, the program, by design, is not actuarially sound because
Congress authorized subsidized insurance rates to be made available for
policies covering some properties to encourage communities to join the program.
As a result, the program does not collect sufficient premium income to build
reserves to meet the long-term future expected flood losses.[6]
FEMA has statutory authority to borrow funds from the Treasury to keep the NFIP
solvent.[7]
Until the 2004 hurricane season,
FEMA had been generally successful in keeping the NFIP on sound financial
footing. It had exercised its authority to borrow from the Treasury three times
in the last decade when losses were heavy and repaid all funds with interest.
As of August 2005, the program had borrowed $300 million to cover an estimated
$1.8 billion in claims from the major disasters of 2004, including hurricanes
Charley, Frances, Ivan, and Jean, which hit Florida and other East and Gulf
Coast states. The large number of claims arising from Hurricanes Katrina and
Rita will require FEMA to borrow heavily from the Treasury, because the NFIP
does not have the financial reserves necessary to offset heavy losses in the
short-term. Following Hurricane Katrina in August 2005, legislation was enacted
that increased FEMA’s borrowing authority from $1.5 billion to $3.5 billion through
fiscal year 2008.[8]
Additional borrowing authority may be needed to pay claims arising from
Hurricanes Katrina and Rita.
Premium Subsidies and
Repetitive-Loss Properties
Affect NFIP’s Actuarial
Soundness
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In reauthorizing the NFIP in 2004, Congress noted that
“repetitive-loss properties”—those that had resulted in two or more flood
insurance claims payments of $1,000 or more over 10 years—constituted a
significant drain on the resources of the NFIP. 11 These repetitive loss properties are
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problematic not only because of
their vulnerability to flooding but also because of the costs of repeatedly
repairing flood damages. While these properties make up only about 1 percent of
the properties insured under the NFIP, they account for 25 to 30 percent of all
claims losses. At the time of our March 2004 report on repetitive loss
properties, nearly half of all nationwide repetitive loss property insurance
payments had been made in Louisiana, Texas, and Florida. According to a recent
Congressional
Research Service report, as of December 31, 2004, FEMA had
identified 11,706 “severe repetitive loss” properties defined as those with
four or more claims or two or three losses that exceeded the insured value of
the property.12 Of these 11,706 properties almost half (49
percent) were in three states—3,208 (27 percent) in Louisiana, 1,573 (13
percent) in Texas, and 1,034 (9 percent) in New Jersey.
As the destruction caused by
horrendous 2004 and 2005 hurricanes are a driving force for improving the NFIP
today, devastating natural disasters in the 1960s were a primary reason for the
national interest in creating a federal flood insurance program. In 1963 and
1964, Hurricane Betsy and other hurricanes caused extensive damage in the
South, and, in 1965, heavy flooding occurred on the upper Mississippi River. In
studying insurance alternatives to disaster assistance for people suffering
property losses in floods, a flood insurance feasibility study found that
premium rates in certain flood-prone areas could be extremely high. As a
result, the National Flood Insurance Act of 1968, which created the NFIP,
mandated that existing buildings in flood-risk areas would receive subsidies on
premiums because these structures were built before the flood risk was known
and identified on flood insurance rate maps.13 Owners of
structures built in flood-prone areas on or after the effective date of the
first flood insurance rate maps in their areas or after December 31, 1974,
would have to pay full actuarial rates.14 Because many repetitive
loss properties were
Flood Insurance Reform Act of 2004,
Pub. L. No. 108-264, section 2(3),(4), (5), 118 Stat. 712, 713 (2004).
Congressional Research Service, Federal Flood Insurance: The Repetitive Loss
Problem, RL32972 (Washington, D.C.: June 30, 2005).
1342 U.S.C.
4014(a)(2), 4015(a), (b).
1442 U.S.C.
4014(a)(1), 4015(c)
built before either December 31, 1974 or the effective date
of the first flood insurance rate maps in their areas, they were eligible for
subsidized premium rates under provisions of the National Flood Insurance Act
of 1968.
The provision of subsidized premiums encouraged communities
to participate in the NFIP by adopting and agreeing to enforce state and
community floodplain management regulations to reduce future flood damage. In
April 2005, FEMA estimated that floodplain management regulations enforced by
communities participating in the NFIP have prevented over $1.1 billion annually
in flood damage. However, some of the properties that had received the initial
rate subsidy are still in existence and subject to repetitive flood losses,
thus placing a financial strain on the NFIP.
For over a decade, FEMA has pursued a variety of strategies
to reduce the number of repetitive loss properties in the NFIP. In a 2004
testimony, we noted that congressional proposals have been made to phase out
coverage or begin charging full and actuarially based rates for repetitive loss
property owners who refuse to accept FEMA’s offer to purchase or mitigate the
effect of floods on these buildings.[9]
The 2004 Flood Insurance Reform Act created a 5-year pilot program to deal with
repetitive-loss properties in the NFIP. In particular, the act authorized FEMA
to provide financial assistance to participating states and communities to
carry out mitigation activities or to purchase “severe repetitive loss
properties.”[10]
During the pilot program, policyholders who refuse a mitigation or purchase
offer that meets program requirements will be required to pay increased premium
rates. In particular, the premium rates for these policyholders would increase
by 150% following their refusal and another 150% following future claims of
more than $1,500.[11]
However, the rates charged cannot exceed the applicable actuarial rate.
It will be important in future studies of the NFIP to
continue to analyze data on progress being made to reduce the inventory of
subsidized NFIP repetitive loss properties, how the reduction of this inventory
contributes to the financial stability of the program, and whether additional
FEMA regulatory steps or congressional actions could contribute to the
financial solvency of the NFIP, while meeting commitments made by the
authorizing legislation.
Data Inconclusive on
Compliance with
Requirements
for Mandatory Purchase of NFIP Policies
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In 1973 and 1994, Congress enacted requirements for
mandatory purchase of NFIP policies by some property owners in high risk
areas. From 1968 until the adoption of the Flood Disaster Protection Act of
1973, the purchase of flood insurance was voluntary. However, because
voluntary participation in the NFIP was low and many flood victims did not
have insurance to repair damages from floods in the early 1970s, the 1973 act
required the mandatory purchase of flood insurance to cover some
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structures in special flood hazard areas of communities
participating in the program. Homeowners with mortgages issued by
federally-regulated lenders on property in communities identified to be in
special flood hazard areas are required to purchase flood insurance on their dwellings
for the amount of their outstanding mortgage balance, up to a maximum of
$250,000 in coverage for single family homes. The owners of properties with no
mortgages or properties with mortgages held by lenders who are not federally
regulated were not, and still are not, required to buy flood insurance, even if
the properties are in special flood hazard areas—the areas NFIP flood maps
identify as having the highest risk of flooding.
FEMA determines flood risk and actuarial ratings on
properties through flood insurance rate mapping and other considerations
including the elevation of the lowest floor of the building, the type of
building, the number of floors, and whether or not the building has a basement,
among other factors. FEMA flood maps designate areas for risk of flooding by
zones. For example, areas subject to damage by waves and storm surge are in
zone with the highest expectation for flood loss.
Between 1973 and 1994, many policyholders continued to find
it easy to drop policies, even if the policies were required by lenders.
Federal agency lenders and regulators did not appear to strongly enforce the
mandatory flood insurance purchase requirements.[12]
According to a recent Congressional Research Service study,[13]
the Midwest flood of 1993 highlighted this problem and reinforced the idea that
reforms were needed to compel lender compliance with the requirements of the
1973 Act. In response, Congress passed the National Flood Insurance Reform Act
of 1994. Under the 1994 law, if the property owner failed to get the required
coverage, lenders were required to purchase flood insurance on their behalf and
then bill the property owners. Lenders became subject to civil monetary
penalties for not enforcing the mandatory purchase requirement.
In June 2002, we reported that the extent to which lenders
were enforcing the mandatory purchase requirement was unknown. Officials
involved with the flood insurance program developed contrasting viewpoints
about whether lenders were complying with the flood insurance purchase
requirements primarily because the officials used differing types of data to
reach their conclusions. Federal bank regulators and lenders based their belief
that lenders were generally complying with the NFIP’s purchase requirements on
regulators’ examinations and reviews conducted to monitor and verify lender
compliance. In contrast, FEMA officials believed that many lenders frequently
were not complying with the requirements, which was an opinion based largely on
noncompliance estimates computed from data on mortgages, flood zones, and
insurance policies; limited studies on compliance; and anecdotal evidence
indicating that insurance was not always in place where required. Neither side,
however, was able to substantiate its differing claims with statistically sound
data that provide a nationwide perspective on lender compliance. [14]
Accurate, Updated
Flood
Maps Are The
Foundation of the
NFIP
Accurate flood maps that identify
the areas at greatest risk of flooding are the foundation of the NFIP. Flood
maps must be periodically updated to assess and map changes in the boundaries
of floodplains that result from community growth, development, erosion, and
other factors that affect the boundaries of areas at risk of flooding. FEMA has
embarked on a multiyear effort to update the nation’s flood maps at a cost in
excess of $1 billion. The maps are principally used by (1) the approximately
20,000 communities participating in the NFIP to adopt and enforce the program’s
minimum building standards for new construction within the maps’ identified
flood plains; (2) FEMA to develop accurate flood insurance policy rates based
on flood risk, and (3) federal regulated mortgage lenders to identify those
property owners who are statutorily required to purchase federal flood
insurance. Under the NFIP, property owners whose properties are within the
designated “100-year floodplain” and have a mortgage from a federally regulated
financial institution are required to purchase flood insurance in an amount
equal to their outstanding mortgage balance (up to the statutory ceiling of
$250,000).
FEMA expects that by producing more
accurate and accessible digital flood maps, the NFIP and the nation will
benefit in three ways. First, communities can use more accurate digital maps to
reduce flood risk within floodplains by more effectively regulating development
through zoning and building standard. Second, accurate digital maps available
on the Internet will facilitate the identification of property owners who are
statutorily required to obtain or who would be best served by obtaining flood
insurance. Third, accurate and precise data will help national, state, and
local officials to accurately locate infrastructure and transportation systems
(e.g., power plants, sewage plants, railroads, bridges, and ports) to help
mitigate and manage risk for multiple hazards, both natural and man-made.
Success in updating the nation’s flood
maps requires clear standards for map development; the coordinated efforts and shared
resources of federal, state, and local governments; and the involvement of key
stakeholders who will be expected to use the maps. In developing the new data
system to update flood maps across the nation, FEMA’s intent is to develop and
incorporate flood risk data that are of a level of specificity and accuracy
commensurate with communities’ relative flood risks. Not every community may
need the same level of specificity and detail in its new flood maps. However,
it is important that FEMA establish standards for the appropriate data and
level of analysis required to develop maps for all communities of a similar
risk level. In its November 2004 Multi-Year Flood Hazard Identification Plan,
FEMA discussed the varying types of data
collection and analysis techniques the agency plans to use
to develop flood hazard data in order to relate the level of study and level of
risk for each of 3,146 counties.
FEMA has developed targets for resource contribution
(in-kind as well as dollars) by its state and local partners in updating the
nation’s flood maps. At the same time, it has developed plans for reaching out
to and including the input of communities and key stakeholders in the
development of the new maps. These expanded outreach efforts reflect FEMA’s
understanding that it is dependent upon others to achieve the benefits of map
modernization.
Monitoring and
Oversight of NFIP
Identifies Specific
Problems, but Does
Not Provide
Comprehensive
Information on
Overall Program
Performance
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To meet its monitoring and oversight responsibilities, FEMA
is to conduct periodic operational reviews of the 95 private insurance
companies that participate in the NFIP. In addition, FEMA’s program
contractor is to check the accuracy of claims settlements by doing quality
assurance reinspections of a sample of claims adjustments for every flood
event. For operational reviews, FEMA examiners are to do a thorough review of
the companies’ NFIP underwriting and claims settlement processes and internal
controls, including checking a sample of claims and underwriting files to
determine, for example, whether a violation of policy has occurred, an
incorrect payment has been made, and if files contain all required
documentation. Separately, FEMA’s program contractor is responsible for
conducting quality assurance reinspections of a sample of claims adjustments
for specific flood events in order to identify, for example,
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whether an insurer allowed an uncovered expense, or missed a
covered expense in the original adjustment.
The operational reviews and follow-up visits to insurance
companies that we analyzed during 2005 followed FEMA’s internal control
procedures for identifying and resolving specific problems that may occur in
individual insurance companies’ processes for selling and renewing NFIP
policies and adjusting claims. According to information provided by FEMA, the
number of operational reviews completed between 2000 and August 2005 were done
at a pace that allows for a review of each participating insurance company at
least once every 3 years, as FEMA procedures require. In addition, the
processes FEMA had in place for operational reviews and quality assurance
reinspections of claims adjustments met our internal control standard for
monitoring federal programs.
However, the process FEMA used to select a sample of claims
files for operational reviews and the process its program contractor used to
select a sample of adjustments for reinspections were not randomly chosen or
statistically representative of all claims. We found that the selection
processes used were, instead, based upon judgmental criteria including, among
other items, the size and location of loss and complexity of claims. As a
result of limitations in the sampling processes, FEMA cannot project the
results of these monitoring and oversight activities to determine the overall
accuracy of claims settled for specific flood events or assess the overall
performance of insurance companies and their adjusters in fulfilling their
responsibilities for the NFIP—actions necessary for FEMA to meet our internal
control standard that it have reasonable assurance that program objectives are
being achieved and that its operations are effective and efficient.
To
strengthen and improve FEMA’s monitoring and oversight of the NFIP, we are
recommending in today’s report that FEMA use a methodologically valid approach
for sampling files selected for operational reviews and quality assurance
claims reinspections.
FEMA Has Not Fully
Implemented NFIP
Program Changes
Mandated by the
Flood Insurance
Reform Act
of 2004
As of September 2005, FEMA had not
yet fully implemented provisions of the Flood Insurance Reform Act of 2004.
Among other things, the act requires FEMA to provide policyholders a flood
insurance claims handbook; to establish a regulatory appeals process for
claimants; and to establish minimum education and training requirements for
insurance agents who sell NFIP policies.[15]
The 6-month statutory deadline for implementing these changes was December 30,
2004.
In September 2005, FEMA posted a
flood insurance claims handbook on its Web site. The handbook contains
information on anticipating, filing and appealing a claim through an informal
appeals process, which FEMA intends to use pending the establishment of a
regulatory appeals process. However, because the handbook does not contain
information regarding the appeals process that FEMA is statutorily required to
establish through regulation, it does not yet meet statutory requirements. With
respect to this appeals process, FEMA has not stated how long rulemaking might
take to establish the process by regulation, or how the process might work,
such as filing requirements, time frames for considering appeals, and the
composition of an appeals board. Therefore, it remains unclear how or when FEMA
will establish the statutorily required appeals process.
With respect to minimum training
and education requirements for insurance agents who sell NFIP policies, FEMA
published a Federal Register notice on September 1, 2005, which included an
outline of training course materials. In the notice, FEMA stated that, rather
than establish separate and perhaps duplicative requirements from those that
may already be in place in the states, it had chosen to work with the states to
implement the NFIP requirements through already established state licensing
schemes for insurance agents. The notice did not specify how or when states
were to begin implementing the NFIP training and education requirements. Thus,
it is too early to tell the extent to which insurance agents will meet FEMA’s
minimum standards. FEMA officials said that, because changes to the program
could have broad reaching and significant effects on policyholders and
private-sector stakeholders upon whom FEMA relies to implement the program, the
agency is taking a measured approach to addressing the changes mandated by
Congress. Nonetheless, without plans with milestones for completing its efforts
to address the provisions of the act, FEMA cannot hold responsible officials
accountable or ensure that statutorily required improvements are in place to
assist victims of future flood events.
We are recommending in today’s
report that FEMA developed documented plans with milestones for implementing
requirements of the Flood Insurance Reform Act of 2004 to provide policyholders
a flood insurance claims handbook that meets statutory requirements, to
establish a regulatory appeals process, and to ensure that flood insurance agents
meet minimum NFIP education and training requirements.
FEMA did not agree with our
recommendations. It noted that its current sampling methodology of selecting a
sample based on knowledge of the population to be sampled was more appropriate
for identifying problems than the statistically random probability sample we
recommended. Although FEMA’s current nonprobability sampling strategy may
provide an opportunity to focus on particular areas of risk, it does not
provide management with the information needed to assess the overall
performance of private insurance companies and adjusters participating in the
program—information that FEMA needs to have reasonable assurance that program
objectives are being achieved.
FEMA also disagreed with our
characterization of the extent to which FEMA has met provisions of the Flood
Insurance Reform Act of 2004. We believe that our description of those efforts
and our recommendations with regard to implementing the Act’s provisions are
valid. For example, although FEMA commented that it was offering claimants an
informal
appeals process in its flood insurance claims handbook, it
must establish regulations for this process, and those are not yet complete.
Concluding
Observations
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The most immediate challenge for the NFIP is processing the
flood insurance claims resulting from Hurricanes Katrina and Rita. Already,
according to FEMA, the NFIP has received about twice as many claims in
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2005 as it did in all of 2004, which was itself a record
year. The need for effective communication and consistent and appropriate
application of policy provisions will be particularly important in working with
anxious policyholders, many of whom have been displaced from their homes.
In the longer term, Congress and the NFIP face a complex
challenge in assessing potential changes to the program that would improve its
financial stability, increase participation in the program by property owners
in areas at risk of flooding, reduce the number of repetitive loss properties
in the program, and maintain current and accurate flood plain maps. These
issues are complex, interrelated, and are likely to involve trade-offs. For
example, increasing premiums to better reflect risk may reduce voluntary
participation in the program or encourage those who are required to purchase
flood insurance to limit their coverage to the minimum required amount (i.e.,
the amount of their outstanding mortgage balance). This in turn can increase
taxpayer exposure for disaster assistance resulting from flooding. There is no
“silver bullet” for improving the current structure and operations of the NFIP.
It will require sound data and analysis and the cooperation and participation
of many stakeholders.
Mr. Chairman and Members of the Committee, this concludes my
prepared statement. I would be pleased to respond to any questions you and the
Committee Members may have.
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512-8757 or at
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jenkinswo@gao.gov. This
statement was prepared under the direction of
Christopher Keisling. Key
contributors were Amy Bernstein,
Christine Davis, Deborah Knorr, Denise McCabe, and Margaret
Vo.
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[1] In March
2003, FEMA and its approximately 2,500 staff became part of the Department of
Homeland Security (DHS). Most of FEMA—including its Mitigation Division, which
is responsible for administering the NFIP—is now part of the department’s
Emergency Preparedness and Response Directorate. However, FEMA retained its
name and individual identity within the department. Under a reorganization plan
proposed by the current Secretary of DHS, the Emergency Preparedness and
Response Directorate would be abolished, and FEMA would report directly to the
Undersecretary and Secretary of DHS.
[2] GAO, Federal Emergency Management Agency:
Improvements Needed to Enhance Oversight and Management of the National Flood
Insurance Program, GAO-06-119 (Washington, D.C.: Oct. 18,
2005).
[3] Bunning-Bereuter-Blumenauer
Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, 118 Stat. 712, 727
(2004).
Program,GAO-03-606T (Washington,
D.C.: April 1, 2003); National Flood
Insurance Program: Actions to Address Repetitive Loss Properties,GAO-04-401T (Washington,
D.C.:
March 25, 2004).
[5] GAO, Flood Map Modernization: Program Strategy
Shows Promise, but Challenges Remain, GAO-04-417
(Washington, D.C.: March 31, 2004).
[6]
GAO, Flood Insurance: Information on the
Financial Condition of the National Flood Insurance Program, GAO-01-992T
(Washington, D.C.: July 2001).
[8] The National
Flood Insurance Program Enhanced Borrowing Authority Act of 2005, Pub. L. No.
109-65 (Sept. 20, 2005).
[9]
GAO, National Flood Insurance Program: Actions to
Address Repetitive Loss Properties, GAO-04-401T
(Washington, D.C.: Mar. 25, 2004).
[10] Flood
Insurance Reform Act of 2004, Pub. L. No. 108-264, section 102(b), (c), 118
Stat. 712, 714 (2004). The act defines a “severe repetitive loss property” to
mean single-family properties that have received at least $20,000 in flood
insurance payments based on 4 or more claims of at least $5,000 each. The act
requires FEMA to define in future regulation which multi-family properties
constitute “severe repetitive loss properties.”
Reserve System, the Office of the Comptroller of the
Currency, the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, and the Farm Credit
Administration.
[13] Congressional
Research Service, Federal Flood
Insurance: The Repetitive Loss Problem (June 30, 2005).
[14] GAO, Flood Insurance: Extent of Noncompliance
with Purchase Requirements is Unknown, GAO-02-396
(Washington, D.C: June 21, 2002).
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